3 Takeaways From DSW's Blockbuster Results

DSW (NYSE: DSW) is just a few quarters into its growth rebound, but investor concerns about a sluggish recovery are quickly fading. This week, the shoe retailer announced a sharp uptick in demand over the spring selling months. That surge of activity combined with rising profitability to materially improve DSW's short-term earnings prospects.

Let's take a closer look.

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Sprinting forward

Sales growth at existing locations shot up to a 10% rate from 2% in the fiscal first quarter. That marked the company's third consecutive quarter of positive comparable-store sales, which suggests that the recovery plan CEO Roger Rawlins and his team have put in place is on firm footing.

But arguably the better news for investors is the scale of DSW's recent sales gains. The double-digit comps spike implies healthy market-share growth even in the strengthening retail environment that helped produce a huge traffic spike for larger peers like Target. "The strong results we've had this spring," Rawlins explained in a press release, "demonstrate we're successfully activating customers and increasing lifetime value." Management cited rising customer traffic and increased spending per visit as two positive trends that contributed to the 10% sales spike.

Healthy profits

DSW found plenty of room to demand firmer pricing from customers, too. That success was clear from the fact that gross profit margin jumped higher by 2.8 percentage points to 32.1% of sales. The gains were mainly due to higher margins on its footwear sales, in combination with the stronger revenue total.

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On the downside, the company gave back most of those gains by spending heavily on marketing and on restructuring. Still, operating profit spiked by nearly 30% after backing out a one-time impairment charge of $36 million related to a reassessment of its Canadian retailing business.

A brighter outlook

DSW decided to exit the Town Shoes business in Canada so that management could focus on its largest retailing franchises in that market. The liquidation of those 38 locations will impact reported earnings for the year, as will the $36 million impairment charge that DSW took with respect to re-evaluating the larger Canada acquisition.

But executives believe the entire Canadian segment will add $215 million of sales to the top line this year while making a modest contribution to adjusted earnings. As for the broader outlook, comps are expected to rise in the low to mid-single digits, compared to the prior projection for growth in a low single-digit range.

Together, these positive trends should result in sales growth of between 6% and 9%, up from management's prior target of a 1% to 3% decline.

DSW also sees its tax rate stopping at 27% rather than 29%. Thanks to that and robust demand trends, the retailer's earnings picture is brightening. DSW is now on pace to earn between $1.60 and $1.75 per share in adjusted profits, while executives had targeted between $1.52 and $1.67 per share back in late May.

There are risks built into that optimistic outlook, and it assumes that the retailer can execute around marketing, pricing, and inventory challenges during the critical holiday shopping season. But DSW is entering that period with significant sales momentum and a selection of products that's clearly resonating with its customers. As a result, the retailer appears set to achieve its best annual sales result since comps jumped 5.5% back in fiscal 2012.

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